Abstract
Chapter 7 analyzes production externalities, with pollution serving as the main example to illustrate the theory. After developing the general model, the chapter turns to a number of specific issues, including a comparison of taxes and subsidies to reduce pollution, the advisability of compensating victims of pollution, Coase bargaining to solve pollution problems, the Command and Control (CAC) approach to reducing pollution favored by the United States, and the possibility of nonconvexities with production externalities.
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